SUSTAINABLE PORTFOLIOS START WITH INDEXING

SUSTAINABLE
PORTFOLIOS
START WITH
INDEXING

Now more than ever, investors are turning to ETFs and index funds to build more sustainable portfolios.

For decades, indexing has helped investors build more efficient portfolios. Today, as more investors transition into sustainable investments, ETFs and index funds are providing the building blocks investors need to pursue their specific financial and sustainability goals.

Capital at risk. This information should not be relied upon as investment advice, or a recommendation regarding any products, strategies. The environmental, social and governance (“ESG”) considerations discussed herein may affect an investment team’s decision to invest in certain companies or industries from time to time. Results may differ from portfolios that do not apply similar ESG considerations to their investment process.

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Five reasons to choose indexing for sustainable portfolios

Explore why we believe sustainable indexing gives investors the clarity they need to build more sustainable portfolios.

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Indexing puts you in control of what type of sustainable investor you want to be

Sustainable investing is not one size fits all. It means different things to different investors depending on their specific sustainability and financial goals. For some, it means simply screening out controversial areas, while for others sustainable investing is about driving specific, measurable positive change.

Disclaimer: The benchmark index only excludes companies engaging in certain activities inconsistent with ESG criteria if such activities exceed the thresholds determined by the index provider. Investors should therefore make a personal ethical assessment of the benchmark index’s ESG screening prior to investing in the fund. Such ESG screening may adversely affect the value of the fund’s investments compared to a fund without such screening.

Pick the sustainable approach that’s right for your portfolio

Many sustainable indexes are built from the same broad index benchmarks investors follow today, but with additional degrees of sustainability screens and ESG insights built in. As a result, investors can use sustainable indexes to directly express what sustainability means to them without altering their broader investment strategies. Also, indexes offer transparency into the details that matter most to you.

Ways to align investing goals
with iShares sustainable strategies

Screened

Investors looking to exclude companies based on controversial business practices

ESG Enhanced

Investors aiming to pursue similar returns to a particular benchmark and maximise ESG scores

SRI

Investors seeking to achieve concentrated ESG holdings by rewarding top ESG performers

Thematic

Investors pursuing specific sustainability themes based on a company’s operations or sources of revenue

Impact

Investors targeting a measurable sustainable outcome alongside financial returns

Source: BlackRock, as of 31 March 2020

Indexing could give you a consistent approach across your portfolio

As investors transition to sustainable investments, an indexing approach could help to ensure sustainability is expressed in a consistent way across the entire portfolio. Indexes are inherently rules based, so the screens and sustainable processes implemented are repeatable, regardless of asset class or exposure. If investors combine funds with different – and potentially contradictory – sustainable styles, it could lead to guessing and confusion as to how sustainability is being expressed.

A clear sustainability narrative

Indexing could help you formulate a clear sustainable investing approach, which in turn can provide you with a straightforward way to explain to others how you are investing sustainably. This means you can spend less time wondering how your sustainable strategies work and focus on selecting the right exposures for your portfolio.

Sustainable indexing drives industry standardisation, promotes clarity and improves corporate behaviour

We are at the beginning of a decades-long shift away from traditional strategies into sustainable investments. As more investors embrace sustainable investing, indexing is helping investors find clarity by showing the precise holdings that make up sustainable investments and by creating standards to help measure the market. These are some of the reasons we believe investors will choose to put an extra $1 trillion* into sustainable index assets in the next decade (all use of $ refers to USD).

Past and predicted growth of sustainable index assets (2009 -2029)

Predicted growth of sustainable indexing
Predicted growth of sustainable indexing

Predicted growth of sustainable indexing key

*Projected growth. BlackRock projection, April 2020, based on Morningstar data, as of March 2020.

Subject to change. The figures are for illustrative purposes only and there is no guarantee the projections will come to pass.

Better data leads to better indexes

Capturing ESG insights through indexes used to be challenging because information about company sustainability practices was scattered and hard to find. Change is underway. The information that feeds into sustainable indexes is improving for two key reasons:

1) Companies are disclosing more ESG metrics to help measure and communicate their efforts at managing risk and creating value through sustainability.

2) Companies are disclosing information in a manner that makes it more readily comparable for investors.

There is no guarantee that research capabilities will contribute to a positive investment outcome.

More companies are reporting on ESG

Increase in companies reporting on ESG

Source: BlackRock, as of 31 December 2019

Driving change

Sustainable indexes will play an increasingly important role in directing investments to companies with the best sustainability practices and the most comprehensive sustainability disclosures. Companies that are dedicated to prioritising sustainability efforts will be better positioned to attract long-term shareholders, as they will have a higher weighting in the market’s new mainstream indexes. At the same time, companies that are slow to addressing sustainability risks may encounter growing scepticism among investors. A company’s inclusion or position in a sustainable index will serve as a clear indication on how it performs against its industry peers, prompting action that can lead to enhanced corporate sustainability practices.

Sustainable index strategies have shown resilience in difficult times

During this year’s market dislocation, sustainable indexes exhibited resilience relative to broad market benchmarks.* We believe this is because sustainable indexes are generally comprised of companies with higher profitability than the broader market. Companies with healthy balance sheets and sound governance practices may be better positioned to focus on mitigating ESG risks and introducing sustainable practices than their less-profitable peers.

Risk: Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

*BlackRock, data from Bloomberg and Morningstar as of 7 May 2020.

Sustainable indexes are generally comprised of companies with higher profitability and lower levels of leverage than the broader market. Companies with healthy finances and sound governance practices may be better positioned to focus on mitigating ethical issues and introducing sustainable practices than their less-profitable peers.

Investors remain committed to the long-term resilience of sustainable indexing

Despite volatile market conditions, investments in sustainable strategies continue to grow at a record pace. Given the long-term nature of sustainable investments, this might indicate that sustainable ETFs and index funds are now becoming the default strategy for investors of all types, as they build their portfolios to invest for their future goals.

Source: BlackRock, as of 31 March 2020.

Index asset managers with active investment stewardship can drive long-term change

Indexing amplifies the impact of company engagements because index investors tend to take a long-term view. Those who are sustainability-minded can exercise their influence over companies through engagements on environmental, social, and governance (ESG) topics. Index asset managers can demonstrate their long-term commitment to a company – potentially well beyond the tenure of the current board and management – and be persistent in encouraging changes in practices to enhance financial sustainability. This includes how companies are managing, as well as reporting on, the material environmental and social impacts of their operations.

There are two main stewardship levers, both of which are crucial to achieving sustainable long-term value creation:

Engagement – or direct dialogue – with companies is critical for ensuring that we vote in an informed way and provide timely feedback to companies to protect our clients’ long-term economic interests.

Voting at shareholder meetings is the formal mechanism through which we provide feedback to companies on their corporate governance and business practices.

In all of our engagements, we encourage companies to deliver long-term, sustainable growth and returns for our clients. BlackRock’s stewardship activities are carried out in all firms within our index funds, regardless of whether the funds have a specific ESG mandate. Learn more about BlackRock’s stewardship practices.

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iShares sustainable ETF range

1BPAS (BlackRock Portfolio Analysis and Solutions) is a team of portfolio consultants that seeks to provide industry-leading tools, analysis and insights for our clients. Through customised, outcome-orientated client engagements around portfolio construction and risk management, the team can assist clients with asset allocation, portfolio restructuring and implementation decisions.

2BlackRock Portfolio Analysis and Solutions, from January 2018 to December 2019.